UK: FCA Policy Statement PS24/9 Payment Optionality for Investment Research

Why should I read this?

Following its consultation earlier this year, which closed on 5 June 2024, the FCA has published Policy Statement PS24/9 “Payment Optionality for Investment Research” along with final rules allowing for the bundling of payments for investment research with execution and brokerage services in specified circumstances.

The bundling of payments for research with execution and brokerage services was effectively prohibited in the UK (and wider EU) in January 2018 by reforms introduced under MiFID II. The changes were originally introduced to address concerns that bundling led to conflicts of interest that might sway the fairness and accuracy of the research.

Currently, firms have two main options under which they can receive research:

• pay for research from their own resources; or
• pay for research from a research payment account (“RPA”).

The FCA’s consultation paper CP24/7 “Payment Optionality for Investment Research” proposed an additional option, allowing the ‘bundling’ of payments for third-party research and trade execution, provided that certain conditions were met.

The Policy Statement implements this new payment option, having taken into account a number of comments received in response to the consultation regarding the guardrails which need to be put in place if research is paid for on a bundled basis. While not fundamental, these changes may make the new option easier to operate and therefore more attractive to asset managers.

It is also interesting that the FCA believe that the changes are adaptable and compatible with the rules of other jurisdictions, and appears to have had in mind, in respect of the latter, pursuit of its new secondary international competitiveness and growth objective.

While not the original focus of the consultation, the FCA has also confirmed that it will effectively permit firms to receive short term trading commentary and advice linked to trade execution outside of the payment for investment research regime (thereby effectively permitting bundling without the guardrails otherwise applicable). This follows market participants highlighting challenges facing UK asset managers receiving research from US firms that are registered as broker-dealers but not as investment advisers.

The new joint payment option will be available from 1 August 2024.

How does the new payment option work?

A firm will be able to make joint payments for third-party research and execution services provided the firm is within the guardrails and:

• has:
  • a formal policy setting out its approach to joint payments and how its governance, decision-making and controls in respect of such payments operate (including how they are separate from those for trade execution);
  • an arrangement which stipulates the methodology for calculating and separately identifying research costs;
  • a structure for the allocation of payments between research providers, including providers of execution services and independent research providers (“IRPs”);
  • allocates research costs between clients fairly so that costs are commensurate with the benefits received; and
  • operational procedures for the administration of accounts used to purchase research;
• carries out at least annually assessments of:
  • the value, quality, use and contribution to investment decision-making of the research; and
  • the reasonableness of the research charges compared to competitors;
• allocates the costs of research which is jointly paid for fairly between clients;
• discloses its approach to joint payments to clients, including:
  • if and how joint payments are combined with any other payment option;
  • key features of the formal policy referred to above;
  • the most significant research services purchased;
  • expected (ex ante) and total (ex post) costs incurred; and
• has a budget for third-party research, reviewed and renewed at least annually based on expected amounts needed to purchase such research, not volumes or values of transactions.

The FCA will not take research services into account when assessing best execution, and the best execution rules of COBS 11.2 continue to apply.

The new joint payment option will be in addition to the current two options, the rules for which will remain the same.  Firms will not be required to offer the joint payment option.

The FCA is also deleting the COBS (COBS 2.3A19R(5)(g)) rule relating to investment research on small and medium enterprises with a market capitalisation of less than £200 million, which essentially permitted a limited form of bundling of research costs in respect of such companies.

Further reading on bundling of payments for investment research

See our previous briefings:

• UK's FCA consults on payment optionality for investment research
• Investment Research Review - call for evidence

How Eversheds Sutherland can help

Our team have been advising on regulatory interpretation and product development for the fund management industry since the 1980s and we have been at the forefront of new products under European and UK regulation since then. Our in-depth understanding of the sector and experience with the practical implementation of new product categories means that we are very well placed to guide you in complying with the changing product and regulatory environment.